Why Western sanctions may have catastrophic effects on Russia

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Western sanctions on Russia

On July 16, the US imposed additional sanctions against Russia for continuing to support pro-Russian separatists in Ukraine. The sanctions, primarily targeted towards the flow of investments into Russia, affected US-listed exchange-traded funds (or ETFs) investing in Russia—like the VanEck Vectors Russia ETF (RSX), the iShares MSCI Russia Capped Index Fund (ERUS), and the SPDR S&P Russia ETF (RBL). These funds are heavily invested in top Russian firms like energy giant Gazprom (OGZPY) and Rosneft Oil Co. (OJSCY).

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In August, the EU (European Union) followed suit and issued its round of sanctions against Russia, affecting Russia’s major energy companies along with important business deals. Canada followed the US and Europe in announcing new economic and travel sanctions against Russian banks and officials on August 6.

sanction on russia

Boomerang effect

Though Russia did retaliate with a ban on food imports from the West, Russia’s sanctions seemed to have more of a boomerang effect on its own economy, which isn’t that significant to the US or EU but which could hurt Russia’s own consumption needs. Russians rely heavily on foreign markets for their consumption needs and spend a large proportion of their budget on food.

Plus, the sanctions have led to a flight of capital from Russia. Both domestic and foreign investors have been withdrawing their money from the country in recent months. To read more about the investment climate in Russia, see Why dark clouds surround the investment climate in Russia.

According to a statement made by Russian Finance Minister Anton Siluanov on Monday, November 24, Russia is suffering losses at a rate of about $40 billion per year because of Western sanctions.

The Russian economy is also suffering losses at a rate of $90–$100 billion per year from the drop in oil prices. Read on to the next part of this series to see the importance of oil prices for the Russian economy.

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